In early 2015, climate change was the coming ESG theme. Since then, the Paris Agreement was signed at COP21, there has been the publication of the TCFD report and subsequently the requirement for large schemes to report on it, the need for trustees to include climate change in their statement of investment principles and not to mention the many conferences on climate change. For trustees, biodiversity is now, in early 2023, where climate change was in early 2015. It needs to catch up. So, with that in mind here are four questions a trustee could ask:
What is biodiversity?
Biodiversity is the variety of animals, plants, fungi and micro-organisms that make up the natural world. These species and organisms work together in ecosystems to maintain balance and support life. The planet’s biodiversity is being seriously depleted, threating the viability of human existence. Since 1970 the Earth’s wildlife populations have fallen by almost 70% – a result of deforestation, excessive human consumption and industrial scale pollution. Mother Nature’s cupboard cannot be raided forever without serious consequences.
Why is this important for schemes?
While leaving a viable planet for our grandchildren should be a personal concern for everyone, why should trustees be concerned with biodiversity loss? It is estimated that around half of the world’s GDP is dependent on nature.
Against this background, there are four possible risks supporting why trustees should incorporate biodiversity considerations into their investment processes:
– Companies that rely on threatened ecosystems will suffer from increased financial risk, with negative effects on their share prices and credit ratings.
– Like climate change, there is transition risk, as governments legislate to mitigate the systemic risk of biodiversity loss.
– Companies that exploit unpriced biodiversity externalities run the risk of reputational risk as media and public opinion
turns against them with the resultant impacts on shareholder value.
– Finally, schemes are unlikely to reach their climate net-zero objective without significant improvements in biodiversity loss. This is because marine and terrestrial ecosystems are the sole sinks of anthropogenic carbon emissions.
What is the emerging legislation?
In December, almost 200 countries signed up to the UN Biodiversity accord at the COP15 summit. The accord commits to halting and reversing biodiversity loss by 2030. Implementation will be key to the accord’s success and that will need increased legislation around the globe.
However, in doing this, unlike climate change (which is essentially a case of controlling carbon emissions) biodiversity has many facets, and they are location
specific. This makes constructing a framework to manage biodiversity risks, and develop disclosure requirements, more complicated. This is the challenge the
Taskforce on Nature-related Financial Disclosures (TNFD) has taken up. It is sensibly adopting the framework pioneered by the TCFD to build on and will
deliver its final report in September.
The TCFD reporting has become a requirement for large pension schemes, but will TNFD reporting go the same way? What should trustees do now? Assuming, like me, you are in the early stages of your biodiversity journey, there are two first steps I would suggest:
–A biodiversity training session for your trustees. Ask your investment adviser to give the presentation, in which they not only explain how biodiversity can affect the scheme, but also how they are incorporating it into the advice they give you.
–Ask your fund managers to explain how they are incorporating biodiversity into the assets they manage for you. There are opportunities for new nature-based funds, but how are they building it into the mandates they already have?
Get biodiversity on your trustee agenda for 2023, even if you are unsure exactly what it will entail. The sooner you start thinking about it the better.
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